If there is a stock that has continually frustrated investors, it's Intel (INTC). The underlying company and management team is, by all measures, top notch. This company has a number of key structural advantages that very few can match, but the problem is that its biggest operating segment - the PC Client Group ("PCG") - faces secular headwinds. More troubling, the company is largely on the sidelines during the smartphone and - until recently - tablet boom.
There's no doubt that the future of consumer computing will be spread across a variety of form factors, from big hulking desktop PCs to the sleekest of smartphones. Starting next week, Intel will finally have a best-in-class tablet processor shipping in a number of designs, and by the end of the year, it will be shipping a competitive smartphone apps processor and LTE modem. The questions, of course, are just how much market share in these new form factors Intel can grab, and how effectively the traditional "PC" form factors can evolve to be desirable once again.
These are open questions, and while nobody has a definitive answer to either, anybody long Intel today is betting that within a couple of years it will be able to gain significant market share in tablets and phones. In fact, Intel is now the #4, by revenue share, vendor of tablet processors, but it won't be until the next generation platform ships in Q4 for designs in Q1 2014 that it will gain meaningful traction in phones. I'm betting that long term, Intel and Qualcomm (QCOM) will be the two largest merchant mobile (phone + tablet) processor vendors.
That being said, the long term isn't in focus right now; there's an earnings report scheduled for release at market close on 10/15, and it's worth giving my expectations of how Q3 turned out and what the initial read on Q4 will look like.
Q3 Probably In-Line, Nothing To See Here
Intel guided for about $13.5B in sales for Q3, up 5.5% sequentially. Interestingly enough, it won't really take much for Intel to get there, and I present my estimates per segment below:
|Q2 2013||Q3 2013 ESTIMATES|
|PC Client Group||$8.1B||$8.43B (+3% Q/Q)|
|Datacenter||$2.743B||$3.01B (+10% Q/Q)|
|Other Intel Architecture||$0.942B||$1.03B (+10% Q/Q)|
|Software and Services||$0.610B||$0.610 (flat Q/Q)|
|Other||$0.416B||$0.53B (+30% Q/Q)|
All told, I'm looking for $13.61B in sales - slightly above the midpoint of guidance. My PC client revenue estimates are actually below the roughly 3.7% Q/Q PC shipment growth given by IDC and Gartner. But where I'm more bullish than others is in the datacenter group and the Other Intel Architecture Group (since I believe that Intel likely saw material shipments of Bay Trail, although the risk here is that 3G baseband shipments continued to plummet). I expect "Other" to be helped by increased NAND demand due to the secular growth in the sector coupled with seasonal tailwinds.
That being said, the really interesting story is Q4.
Plenty Of Uncertainty For Q4
When it comes to the Q4 guide (which, in my humble view, is what will set the trend for the shares for the quarter), there's plenty of uncertainty. How well will Bay Trail based systems sell through after the initial build we see in Q3 - is there upside to the demand there? How about the ramp of both Avoton/Rangeley and Ivy Bridge-EP in the datacenter? By how much will the demand accelerate into Q4? Will the PC space begin to recover as both Haswell based systems begin to ramp at the higher end and as Bay Trail-M systems ramp at the lower end?
While Intel's full year guidance gives us a ballpark estimate for what to look for (~$14.4B, or +6.7% Q/Q), there is of course risk for a guidance revision upwards or downwards at the coming earnings call. Further, while the guide will likely reflect the OEMs' expectations and current build plans, upside/downside to demand (who knows, people might really love those new Windows 8.1 8" tablets or those cheap Bay Trail-M systems) could manifest itself mid-quarter as the devices actually sell-through.
The Price Acton Has Been Interesting
Quite frankly, the price action ahead of the earnings report has been encouraging. One of the sell siders decided to downgrade the shares right near the bottom in the mid $22 range, but since then, the shares have performed rather nicely. Estimates have come down, but the share price has moved right on up. If Intel were so obviously going to have to guide down, and given how hated the stock/company is at the moment, then why isn't the stock tanking?
I think what we're seeing here is that there is a fairly substantial short interest in the stock just betting on something disastrous happening - a big miss, a full year guide down, or something to that effect, which means that it's no longer a "sure bet" on the short side. This doesn't mean that the company can't guide for Q4 and the full year, nor does it mean that mid-flight during Q4 things don't go wrong, but there is now a non-zero probability that 2013 exits on a solid note and that 2014 estimates go up (particularly if Bay Trail sell-through is good, giving the sell-side some hope for Intel's roll-out of Merrifield for phones).
Nothing's a sure bet in life, and there's still a chance in the world that Intel disappoints yet again with another guide-down. But at this point, I seriously doubt it. Datacenter growth will be very robust during Q4, Haswell based systems will finally roll out which could lead to upside, Bay Trail-M systems could reignite PC sales (much lower price points, better quality systems), Bay Trail-T could drive meaningful tablet growth, and NAND should do well. All in all, my bet is that Q3 will mark the end of Y/Y top line declines for Intel and that may be enough to help this stock - which has significantly underperformed the market - catch very quickly up to its peers.
My analysis of the earnings report will be available a couple of hours after the conference call tomorrow. Don't miss it.
Additional disclosure: I am also long INTC January 2015 $25 calls.